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While the focus has been on the crisis in Ukraine and need for European nations to boost their defence budget, Rachel Reeves’s main role has been to sign cheques for President Volodymyr Zelensky’s war effort and increase funding for British military and security.
But the focus is about to fall sharply on to the chancellor as she prepares to present her spring statement on Wednesday 26 March – an event which is already shaping up to be an emergency Budget.
At stake for her and Sir Keir Starmer is a desperation to spark economic growth after the enormous backlash against her Autumn Budget, with its record £40 billion tax rises, including a massive jobs tax hike by raising national insurance.
While businesses are applying pressure for no new tax rises, trade unions are beginning to make noises about public pay settlements again, and Labour MPs are beginning to get nervous about the prospect of “austerity 2” with a round of spending cuts.
Already there are potential rebellions over the so-called tractor tax of imposing inheritance tax on farms and the cut to international aid. The issue is what further horrors will Ms Reeves have to perform?
The gloomy prognosis – tax hikes and cuts
The Institute for Fiscal Studies (IFS), probably the most respected forecasting think tank in the UK on the economy, is pessimistic about what needs to be done and the general state of the economy.
It has pointed out that higher borrowing costs and stagnant economic growth wiped out her £9.9 billion backstop.
As a result the IFS has concluded that Ms Reeves will have to hike taxes or bringing in a new round of austerity cuts or even both.
IFS research economist Dr Isabel Stockton warned that Ms Reeves’ spending plans “would be less generous than Jeremy Hunt was planning to be”.
What Starmer and Reeves have said
Both the prime minister and chancellor have tried to play down fears in recent days as the spring statement draws closer.
On a flight to Washington DC last week, Sir Keir admitted there could be tax rises but tried to provide assurance that it would not be as bad as the Budget.
Ms Reeves in turn has asked the Office of Budget Responsibility to look at the impact of her cutting billions from welfare – a plan drawn up first by Liz Truss and withdrawn after a Tory rebellion led by Michael Gove.
What is safe?
There are just three areas of protected spending in Sir Keir’s government – defence, the NHS and schools.
The NHS budget was tied into the reform of the health service and guaranteed at the Autumn Budget.
Since then the decision to take defence spending up to 2.5 per cent by 2027 and 3 per cent after the next election has also guaranteed the Ministry of Defence’s budget, although questions remain how that money will be spent.
Outside the tax raid on private schools, the schools budget has also been protected.
But this means that every other department will be expected to “find efficiencies” which is Whitehall speak for cuts.
Where will the cuts fall?
We know already about some of them. For example, the increase in the defence budget is largely being paid for by a cut in foreign aid.
Ms Reeves has also indicated that welfare is going to be a major target.
There appears to be little room for significant tax rises, especially after the election commitment not to raise VAT, income tax or employee national insurance contributions.
The only other option is that Ms Reeves breaks one of her rules and borrows more money. This though will increase the cost of borrowing at a time when UK government gilts which underpin that borrowing are high.
